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I think I have a good understanding of the finance side of BEC, but I don’t understand how some of the answers are calculated. If you could take a stab and answer them, much appreciated!
Q1) Company A is considering replacing an existing machine with a new machine. The new machine = $160K in cash, shipping cost is $30K, and the investment in the new machine will require an immediate increase in working capital of $35K. PV of $1 at 10% is .621 for 5 periods. The overall discounted CF impact of Company A’s working capital investment for the new production machine would be:
A)
(35,000) + 21,735 = -13,265
Me: I understand that the new machine will require WC of $35K, but where is 21,735 coming from? I see that it is $35,000 * .621 to get 21,735, but where in that question do we see that it is there will be cash inflow?
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Q2) For the next 2 years, a lease is estimated to have an operating net CF of $7,500 per annum, before adjusting for $5K per annum tax basis lease amortization, and a 40% tax rate. The PV of an ordinary annuity for $1 per year at 10% for 2 years is $1.74. What is the lease’s after tax PV using a 10% discount factor?
A) (7,500 * 1.74) – (7500-5000)(40%)(1.74) = $11,310
Me: What I did –>
7,500 * 0.6 = $4,500 [=Net income]
5000 * .4 = 2,000 [tax shield=
Total = $6,500
$6,500 * 1.74 = same answer
Did I do it correctly to get the same answer, or was it coincidence? Thanks again!
B - (4/2012)
A - (5/2012)
R - (1/2012) Done!
F - (10/2011) Done!
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